Indian rupee firms up on hopes of forex measures

The beleaguered Indian rupee rose 1.3 per cent this morning in anticipation of government measures to stem the rot in the currency.

The rupee rose to 15.358 against the UAE dirham (56.41 against the US dollar) at 10am UAE time (6am GMT) today after weeks of losses and making fresh lifetime lows on Friday on expectations that the Indian government will allow greater foreign investment in the local bond market as part of steps to prop up the currency.

Any relaxation in the caps on international investment might see foreign institutions park more money in high-yielding Indian bonds, as well as take advantage of the arbitrage opportunity provided by the different between the high interest rates that Indian banks pay on deposits compared with near-zero rates in the Western institutions’ home bases.

However, Indian expats in the UAE and elsewhere around the region and world can take solace in the fact that the exchange rates are still expected to remain in their favour in the long run as the Indian economy grapples with fundamental flaws and historically high fiscal and trade deficits.

Analysts maintain that any respite that the rupee gets as a result of today’s measures will be temporary, and unless India puts its finances in order, its currency will remain a candidate for further deterioration.

The Indian rupee was the worst performing emerging markets currency last year. It has already lost more than 28 per cent of its value in less than one year, falling from a 52-week high of Rs11.998 vs. Dh1 on August 2, 2011, to the current rate of Rs15.358 vs. Dh1.

The economy, which was one of the world’s star performers during the 2008-09 economic meltdown, has seen its fundamentals decline rapidly in the past three years, making its currency vulnerable to the global investor’s risk-aversion stemming from the widening sovereign-debt crisis in Europe and concerns about slowing global growth.

Last week, global credit rating agency Fitch lowered India’s sovereign-credit outlook to negative from stable, citing heightened risk of further deterioration in the country’s growth potential, and a failure in controlling the nation’s ballooning twin deficits.

In late April, Standard and Poor’s, another global ratings agency, put India’s economy on watch for a downgrade, citing the country’s struggle to rein in its relatively high debt and fiscal deficit amid a political impasse that is unlikely to ease before the next national general elections due in 2014.

S&P had, in early June, further warned that India is in danger of becoming the first among the BRIC nations to fall a ‘junk’ investment grade.

The ratings agency said that India has a one-in-three chance of seeing a debt downgrade in the next 24 months. Any downgrade will see Indian debt losing its investment grade status and in effect attaining ‘junk’ status, with the S&P currently rating the country’s debt at BBB-, the lowest investment-grade rating.

The country’s industrial growth has been slowing down since last year, and export growth too has witnessed a sharp decline since the second half of 2011.

On the other hand, its imports bill has been rising steadily thanks to higher crude and gold prices. The country reportedly imported gold and silver worth $60 billion in 2011/12, pushing up the trade deficit to near $185 billion, and is in desperate need for foreign investment to finance this yawning deficit.

The rate of growth in exports has been plummeting continuously since July, when it hit 81.79 per cent. In imports, the monthly growth rates have been highly volatile. The trade deficit has widened to $93 billion in the first seven months of this financial year and could even breach $150 billion.

Depressingly, the rupee has been in a freefall despite the Indian government’s various efforts to shore up the beleaguered currency.

(Image courtesy Shutterstock)

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